Greenspan: Double Dip Will Hit If Home Prices Continue Plunge

Former Federal Reserve Chairman Alan Greenspan said the economic recovery has paused, so it feels like a "quasi-recession" and warned that a double dip is possible if home prices continue to plunge.

“We’re in a pause in a recovery, a modest recovery, but a pause in the modest recovery feels like a quasi-recession,” Greenspan said on NBC's "Meet the Press."

He said another downturn, or a so-called double-dip recession, was possible “if home prices go down. Home prices, as best we can judge, have really flattened out in the last year.”

U.S. economic recovery has lost momentum as indicated by a host of key economic indicators, including the worse-than-expected GDP figure released Friday.

U.S. economy grew at a 2.4 percent annual rate in the second quarter of this year, a deceleration from an increase of 3.7 percent in the first quarter of 2010 and 5.0 percent in the last three months of 2009, the Commerce Department said.

Greenspan said that most economists expect “a small dip” in home prices.

The National Association of Realtors reported that the pace of home sales fell in June for a second month. Homes are selling at an annual rate of 5.37 million, and the group’s chief economist Lawrence Yun said transactions will be “very low” in coming months, Bloomberg reported.

“If home prices stay stable, then I think we will skirt the worst of the housing problem,” Greenspan told NBC.

“But right under this current price level, mainly 5, 7 or 8 percent below, is a very large block of mortgages, which are under water, so to speak, or could be under water. And that would induce a major increase in foreclosures, foreclosures would feed on the weakness in prices, and it would create a problem.”

The collapse of the housing market triggered the worst financial crisis since the 1930s. While other sectors, including manufacture, service and financial industry, have shown gradual improvements since recovery began in the second half of last year, the housing market seems to be stubbornly sluggish and continues to drag down the fragile recovery.

The International Monetary Fund has warned that even though it doesn't see another recession, there is a big risk of a double dip in the housing market.

Greenspan also said that long-term unemployment is pulling the economy apart even though large banks are doing much better and large companies are in excellent shape.

He predicts that unemployment will remain where it is, hovering around 9.5 percent, for the rest of the year.

Greenspan said that a rising stock market will do more to stimulate the economy than any of the remedies now being discussed.

Former Federal Reserve Chairman Alan Greenspan said the economic recovery has paused, so it feels like a quasi-recession and warned that a double dip is possible if home prices continue to plunge.
We re in a pause in a recovery, a modest recovery, but a pause in the...